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The Tax Benefits of Self-Employment February 20, 2025
Lowering one's tax burden is not the reason to pursue self-employment, but it is something worth understanding if you're exploring self-employment.
It's tax preparation time, the secular equivalent of crawling around the temple on cobblestones littered with broken glass. When our numbed minds read instructions like this--"Enter the smaller of line 10 or line 14. Also enter this amount on the applicable line of your return (see instructions)"--we wonder which is more applicable--Kafka's Castle, filled with unseen workers toiling away 24/7 getting nothing remotely useful accomplished, or Huxley's loving our servitude, or perhaps a tortuous mix of both. The simplified form for wage earners is much easier, of course, but it offers precious little in the way of deductions or tax breaks. The tax system for wage earners without huge mortgage interest or out-of-pocket medical expenses deductions is relatively skimpy in terms of tax breaks. The complexity--and the tax breaks--apply mostly to enterprises, from sole proprietors on up. I am not a tax professional, I am only sharing my experience as a self-employed worker. This is not tax or financial advice, it's an account of what I've learned preparing my own taxes for decades. Like most people, I rely on the tax preparation software to comply with tax codes and to do the heavy lifting of preparing the tax return. Of my 54 years of working and paying taxes, 14 were as an employee and 40 were self-employed, so I have experience in both realms. What continues to amaze me is the number of straightforward tax breaks available to the self-employed / sole proprietor. Let's avoid sugarcoating self-employment: it's difficult, demanding and risky. As a general rule, self-employment demands more of us than being an employee on all fronts: we own it all, victories and mistakes. Regulatory burdens and shadow work eat us alive. Much of what passes for self-employment now is low-paid gig work with little upside. So there is a trade-off here: self-employment is difficult to build up and keep going (taking a vow of poverty is a good start), which is why so few people manage to earn a middle-class income via self-employment outside the professions (accountant, attorney, etc.)--and even those fields are not easy paths to reliable livelihoods. But there are tax advantages. Let's start with business expenses. How we run our business is up to us. If we keep track of legitimate expenses (bought lunch for Client A, drove X miles to post office to mail packages, etc.), then nobody can deny that business expense. And if Client A only spent 10 seconds of an hour-long lunch talking "business," that's the nature of business lunches. Everyone understands there's wiggle-room in expenses. The system is designed to seek out unsubstantiated claims, not question how we run our business. If you happened to stop at the supermarket on the way to the post office, nobody's going to nix your mileage deduction. You went to the post office to mail a business-related package, and here's the receipt. Then there's the list of deductions for things you had to pay anyway. The self-employed pay both the employee and employer parts of Social Security and Medicare, so that's a hefty 15.3% of taxable income. But half of this self-employment tax is deductible. The cost of your healthcare insurance is also deductible. Retirement funding is another benefit. Yes, wage earners with 401K plans can contribute big chunks of cash into their tax-deferred accounts, but not every employee has a 401K plan at work. the basic limits for contributing to an IRA (individual Retirement Account) is $7,000--not much in today's inflationary era. The self-employed can open a Solo 401K that offers two benefits: the sums that can be stashed in the tax-deferred account are substantial (depending on one's income and age, $30,000 and up), and the Solo 401K funds can be used to buy precious metals or rental real estate as well as traditional financial assets--options not available to corporate 401K plans. Then there's the Qualified Business Income Deduction, a deduction available to most sole proprietor enterprises that tax-prep software such as TurboTax generates automatically. If you have a dedicated home office, the costs of that percentage of your house can be deducted as an expense. These deductions knock down your taxable net income, reducing your tax burden. And you can take the standard deduction, of course, further reducing your taxable income. All this requires tedious, attention-to-detail bookkeeping. That takes effort. But that's part of being in business. Yes, some people try to get away with absurd deductions, but it's easier to assume every expense / deduction will be audited, and proceed accordingly. There are plenty of legitimate expenses and deductions, so flim-flam is unnecessary. Lowering one's tax burden is not the reason to pursue self-employment, but it is something worth understanding if you're exploring self-employment. There are roughly 9.8 million unincorporated self-employed (700K in agriculture and 9.1 million in non-ag sectors) and about 6.5 million incorporated self-employed, which are typically professionals in healthcare, legal and accounting services, engineers, architects, etc. Compare these to the wage-salary workforce of 152 million. Labor Force Statistics (BLS) As we might expect, self-employment rises in booms and declines in busts. It is currently around the same numbers it reached 30 years ago, despite the U.S. population rising by 30%, from 265 million in 1995 to 345 million in 2024. This suggests self-employment is declining as a percentage of the workforce. This also doesn't factor in the reality that the many self-employed workers earn modest sums and have a wage job to supplement their income. It's more challenging to start self-employment now, and more challenging to make a middle-class livelihood as a self-employed worker. Many regulations seem designed to favor corporations, and many locales claim to favor small business but do little to make it easier / cheaper to start a sole proprietorship. 
For many of us self-employed, we have no choice. The independence and accountability are what allow us to to thrive as human beings. New podcast: Charles Hugh Smith - LeafBox -- wide-ranging discussion of Anti-Progress, technology, mythology, and experimenting to right-size your own electrical utility... My recent books: Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site. The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $18, (Kindle $8.95, Hardcover $24 (215 pages, 2024) Read the Introduction and first chapter for free (PDF) Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF) The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF) When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF) Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF). A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF). Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World (Kindle $5, print $10, audiobook) Read the first section for free (PDF). The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF) Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free Become a $3/month patron of my work via patreon.com. Subscribe to my Substack for free The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $20, (Kindle $9.95, Hardcover $24 (215 pages, 2024) audiobook, Read the Introduction and first chapter for free (PDF) 
What if growth--and policies to accelerate growth--are no longer working because our fix for every problem--growth for growth's sake--is failing? We're told Progress is inevitable as a result of technology, but everyday life is getting harder, not easier--the opposite of Progress, what I call Anti-Progress.
What if the real source of the unraveling is far deeper than economics or politics? What if the problem is what we see as the inevitable destiny of humanity--Progress--is actually a modern mythology, disconnected from the real-world consequences of growth for growth's sake? We indignantly reject that Progress is a mythology, but our need for mythology hasn't gone away because we've mastered technology; we've created a modern mythology of technology that is heedless of its own consequences. To truly progress, we need a new mythology aligned to 21st century realities. That's the goal of this book. Read the Introduction and first chapter for free Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF) 
Just as no one was left unaffected by the rise of globalization, no one will be unaffected by its demise.
The only response that reduces our vulnerability is self-reliance: de-risk your life by carving a path that works for you.
When Ralph Waldo Emerson wrote his famous essay Self-Reliance in 1841, the economy was localized and households supplied many of their own essentials. Now we're dependent on distant sources for our essentials. For Emerson, self-reliance is thinking for ourselves rather than taking the conventional path. Self-reliance today means reordering our priorities and values. Self-reliance is often confused with self-sufficiency--the equivalent of Thoreau's cabin. But self-reliance isn't about piling up money or an isolated cabin; it's about cooperating with trustworthy others in productive networks. The book details the essential mindset of self-reliance and 18 nuts and bolts principles of self-reliance in the 21st century. Podcast with Richard Bonugli: Self Reliance in the 21st Century (43 min)
Recent entries: The Tax Benefits of Self-Employment February 20, 2025 The Problem With Money Isn't Money February 18, 2025 Automation Institutionalizes Mediocrity February 14, 2025 The Not-So-Strange Paradox of American Power and Dysfunction February 13, 2025 The One True Test of AI Intelligence February 12, 2025 Corporations as Modern-Day Warlords February 10, 2025 The Crises Yet to Come February 6, 2025 Lots of Solutions, But for Which Problems? February 3, 2025 Begging Bowl '25: I'm Looking for Two Readers Willing to Help Me Buy a New Thrift-Store Shirt February 2, 2025
AI Is a Digital Parrot: Word-Traps, False Logic and the Illusion of Intelligence
January 31, 2025
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Extra-Special Bonus Aphorisms:
"There is no security on this earth; there is only opportunity." (Douglas MacArthur) "We are what we repeatedly do." (Aristotle) "Do the thing and you shall have the power." (Ralph Waldo Emerson) "Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius and a lot of courage to move in the opposite direction." (E.F. Schumacher, via Tom R.) "He who will not risk cannot win." (John Paul Jones) "When we drink coffee, ideas march in like the army." (Honore de Balzac) "Progress is not possible without deviation." (Frank Zappa, via Richard Metzger) "Victory favors those who take pains." (amat victoria curam) "The man who has a garden and a library has everything." (Cicero, via Lee Bentley) "A healthy homecooked family meal and a home garden are revolutionary acts." (CHS) "Do you know what amazes me more than anything else? The impotence of force to organize anything." (Napoleon Bonaparte) "The way of the Tao is reversal" Or "Reversal is the movement of Tao." (Lao Tzu) "Chance favours the prepared mind." (Louis Pasteur) "Success consists of going from failure to failure without loss of enthusiasm." (Winston Churchill) "Where there is ruin, there is hope for treasures." (Rumi) "The realm of gratitude is boundless." (CHS, 11/25/15) "History doesn't have a reverse gear." (CHS, 12/22/15) Smith's Law of Conservation of Risk: Every sustained action has more than one consequence. Some consequences will appear positive for a time before revealing their destructive nature. Some consequences will be intended, some will not. Some will be foreseeable, some will not. Some will be controllable, some will not. Those that are unforeseen and uncontrollable will trigger waves of other unforeseen and uncontrollable consequences. (July 8, 2014)(thanks to Lew G. for retitling the idea.) Smith's Neofeudalism Principle #1: If the citizenry cannot replace a kleptocratic authoritarian government and/or limit the power of the financial Aristocracy at the ballot box, the nation is a democracy in name only. The Smith Corollary to Metcalfe's Law (The Network Effect): the value of the network is created not just by the number of connected devices/users but by the value of the information and knowledge shared by users in sub-networks and in the entire network. (CHS, 4/6/16) My Credo of Liberation: I no longer care if the power centers of our society--the distant, fortified castles of our financial feudal system--are changed by my actions, for I am liberated by the act of resistance. I am no longer complicit in perpetuating fraudulent feudalism and the pathology of concentrated power. I no longer covet signifiers of membership in the Upper Caste that serves the plutocracy. I am liberated from self-destructive consumerist-State financialization and the delusion that debt servitude and obedience to sociopathological Elites serve my self-interests. (Thank you, Klaus-Peter L., for reminding me) "We've become a culture of excuses rather than solutions: solutions always require sustained effort and discipline." (CHS 4/9/16) "Fraud as a way of life caters an extravagant banquet of consequences." (CHS 4/14/16) "Creativity = problem solving = value creation." (CHS 6/4/16) "Truth is powerful because it is the core dynamic of solving problems." (CHS 7/21/17) "We live in a system of human emotions that masquerades as a science (economics)." (CHS 1/1/18) "Always remember, your focus determines your reality." (George Lucas) "Diversity is for poor people. Sameness is for the successful." (GFB) "When power dissipates suddenly, it dissipates completely." (CHS 7/14/19) "Disobedience is the true foundation of liberty. The obedient must be slaves." (Henry David Thoreau) "Markets cannot price in the value of non-monetized natural assets such as diverse ecosystems." (CHS 7/14/19) "Magical thinking isn't optimism, it is folly." CHS 1/3/22) "Tune in (to self-reliance), drop out (of hyper-consumerism and debt-serfdom) and turn on (to relocalizing capital and agency)." (CHS 1/5/22) "The path to everything you desire starts here: like yourself as you are right now." (CHS 11/20/22) "There are only two signals: how many essentials you produce and share and if you're consuming less with better results. Everything else is noise." (CHS 12/17/22) "Liberation is no longer needing any confirmation or feedback from others or the world for one's sense of self. Wealth, fame, recognition, admiration, praise, prestige, approval, sainthood, martyrdom, success: none are needed, none are desired." (CHS 12/26/22) "When fame, wealth, prestige, status and glory are out of reach, you're free to pursue other more valuable things." (CHS 2/6/22) "It is the sacred duty of every activist who seeks to better their community to grow and share as much life-giving food as is humanly possible." (CHS 6/15/23) "Being anonymous, gray and unknown is the ideal state of freedom." (CHS 3/15/24) "We seem to have entered a world of anti-leisure and anti-productivity in which the unpaid shadow work demanded to keep all the complicated digital bits in motion obliterate our leisure and productivity." CHS (5/22/24) "It is axiomatic that failing systems work the best just before they fail catastrophically." Ray W. "Looking younger is mere technique; thinking younger demands creativity." CHS (10/16/24) "Tell me what's taboo and I'll tell you the truths that threaten the status quo." CHS (12/15/24) "This is the core of the Attention Economy: the ultimate addiction is the addiction to ourselves." CHS (1/28/25) |
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